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Sunday, December 2, 2012

EUPHORIA STAGE

I think we are on the verge of entering the euphoria stage of this cyclical bull market.

The
euphoria phase is where the rate of change starts to accelerate as
traders become convinced that the economy is booming, and will continue
to boom into the foreseeable future (the last bull market), or in this
case that QE3 is a magic elixir with no unintended consequences.

During this final phase the character
of the intermediate cycles should change and instead of a modest move
above the prior intermediate top we will see a strong acceleration and a
significant and sustained breakout above the September high of 1475.
All of the traders that have convinced themselves that QE is having less
and less effect are about to be caught off guard as we move into the
euphoria phase of the bull market.

You can see in the chart below in
2006/07 the intermediate cycle accelerated rapidly past the prior
intermediate top at 1326 in a classic runaway move. While this certainly
felt good at the time, it was the beginning of the end as the housing
and credit bubbles began to implode.

I
think we are on the verge of something similar as I believe QE3 will
drive the market high enough to test or marginally break the all-time
highs. However, it’s also going to start an upward spiral in commodity
inflation that will eventually poison this fragile economy and be the
straw that breaks the camels back.

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